Good day, and welcome to the BJ's Restaurants, Inc., Second Quarter 2019 Earnings Release and Conference Call. Today's conference call is being recorded. At this time, I'd like to turn the conference over to Mr. Greg Trojan, Chief Executive Officer. Please go ahead, sir..

Thank you, Operator. Good afternoon, everyone, and welcome to BJ's Restaurants fiscal 2019 second quarter investor conference call and Webcast. I'm Greg Trojan, BJ's Chief Executive Officer, and joining me on the call today is Greg Levin, our President and Chief Financial Officer.

We also have Kevin Mayer, our Chief Marketing Officer and Greg Lynds, our Chief Development Officer on hand for Q&A. After the market closed today, we released our financial results for the second quarter of Fiscal 2019, which ended July 2nd. You can view the full text of our earnings release on our Website at www.bjsrestaurants.com.

Our agenda today, we'll start with Rana Schirmer, our Director of SEC Reporting, providing our standard cautionary disclosure with respect to forward-looking statements.

I will then provide an update on our business and current initiatives and then Greg Levin will provide a recap of the quarter and some commentary regarding the balance of Fiscal 2019, and after that, we'll open it up to questions. So, Rana, go ahead, please..

Thanks, Greg. Our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements.

Investors are cautioned that forward-looking statements are not guarantees of future performance, and that undue reliance should not be placed on such statements. Our forward-looking statements speak only as of today's date, July 25, 2019.

We undertake no obligation to publicly update or revise any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events, or otherwise, unless required to do so by the Securities laws.

Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the company's filings with the Securities and Exchange Commission..

Thanks, Rana. BJ's record second quarter revenue reflects our continued success in driving positive comparable restaurant sales and further progress with our off-premise sales, menu innovation and unit expansion initiatives. Our Q2 comparable sales of 2% extended our trend of materially outpacing the industry in both sales and traffic.

Our second quarter sales outpaced the competition as measured by Black Box by 210 basis points. While traffic outperformed the industry by 150 basis points, particularly impressive when you consider that we were lapping outperformance of a year ago above 400 basis points on both measures.

In fact, for the quarter ended July 2, our two-year accumulative sales growth rate was 7.6%; the highest level in over six years. BJ's has now outperformed Black Box sales over the last eight quarters or two years by 280 basis points on average per quarter and by 250 basis points per quarter in traffic.

There's no better evidence of the sustainable competitive advantages we are building when it comes to guest preferences and are consistent ability to gain share in today's incredibly competitive environment.

As encouraged as we are about the continuation of our sales momentum, we continue to face an inflationary cost environment including weather related increases in cost of sales, wage rate pressures and the incremental cost of growing our off-premise business.

Commodities, primarily driven by produce, increased by approximately 2.3% in Q2 as weather impacted California crop yields and supplies of Mexican avocados. Effective wage rates continue to increase by mid single digits this year and Q2 labor of 36% came in slightly higher than the level we discussed on the Q1 call.

The labor increase reflects these higher hourly wages as well as our discretionary investments in labor for our new check building slow-roasted items and the initial rollout of our new kitchen systems.

Against this backdrop, and reflecting our initiatives to become the employer of choice for the best talent in the industry, we are encouraged that hourly team member turnover trends are improving versus last year and we're hopeful this is an indication that labor availability versus demand is starting to level off.

With nearly 30% continued quarterly growth in our off-premise business, we also incurred pressures on our restaurant operating margin related to higher third-party delivery fees. Keep in mind, these additional off-premise sales are delivering incremental margin dollars to our business.

That said, as we previously indicated, given all of these current cost factors in our business, we need to drive comparable restaurant sales in the neighborhood of 3% to maintain our restaurant level margins.

At BJ's, we've always focused on building sales while at the same time investing in systems, process initiatives and other efficiencies that allow us to operate in a high return profitable manner. So I'll now review some of our progress on these fronts.

Our extremely successful introduction of our Tri Tip entrees along with the prudent management of our depth and frequency of promotions, drove healthy guest check in the 3% range for the quarter; a nice improvement over Q1's positive 1.7%.

In order to achieve our 3% comp sales objective, we plan to focus on our value oriented traffic and check building menu additions growing, our off-premise sales and continuing to drive promotion and discounting efficiency while maintaining our strength in traffic.

We believe that our continued success in the higher priced slow roast category of our menu along with our recent loaded burger promotion bodes well for continued healthy levels of check growth.

With the addition of our Tri Tip Sirloin menu items, order incidence of our slow roast category has increased by nearly 70% over last year and collectively, our Tri Tip items now represent one of our most popular entree categories.

While we love the check benefit of these items, much like our prime rib introduction, our new slow roast products can also drive great value for our guests and our Tri Tip combination dishes are great examples of that.

We took the opportunity to add our Tri Tip entree to our Brewhouse Specials line-up at $13.95 to give our guests an even greater value on Thursday nights. In terms of off-premise, we're encouraged by the growth of our large party catering business in the early days after launching our new menu, Website and our new order processing.

Although very early and still a small part of our off-premise business, we're seeing both traffic and off-premise check growth as a result of the increases in these catering orders. Overall, our off-premise business continues to grow at over 20% even though we completed full system coverage of third-party delivery late last year.

More importantly, the ongoing systems and operational improvements we and our delivery partners are making are producing a solid guest experience as demonstrated by the improving net promoter scores for orders sourced from our Website and app and delivered by third-parties.

Driving our top-line is the best way for us to offset the cost pressures we face. In addition, we're working as hard as ever to unearth opportunities for us to improve the efficiency of every aspect of our operations.

Last quarter we began the rollout of our gold standard kitchen systems initiative and we will complete this kitchen reorganization effort in the next few weeks. This effort is focusing on how we organize, set up and prep our kitchens for successful shift execution.

We've evaluated every aspect of our kitchen value chain from how and what food and supplies we order to order quantities to how we physically receive and store, to who and when we perform prep for our kitchen lines.

While our investments in training and labor came at a somewhat difficult time given the wage pressures we're facing, we believe we're making this investment at exactly the right time.

Our gold standard kitchen systems are creating a new level of kitchen organization and process driving even better food quality and speed while as importantly making our kitchens more satisfying places for our team members to work.

It's only been a few weeks post execution for some restaurants, but we're already seeing that our initiatives are working and that our kitchens are operating more effectively.

Investing in growth initiatives like our Tri Tip slow roast menu, GSKS kitchen systems, our infrastructure around off-premise and large party catering have put a lot on our operators plate. I could not be more proud of how well our teams have responded to these efforts and how impressively they are executing.

Still room for improvement, of course, but we continue to build greater separation in terms of guest experience versus our competition, as again, is evidenced by our ability to consistently grow market share in our industry.

And at the same time, we're building differentiation for BJ's in the restaurant industry as a gold standard employer and employer of choice and we see that beginning benefit -- I'm sorry, and we see that bringing benefits to everything we do.

While our concept remains a leader in sales and traffic metrics in the casual dining space, we continue to refine every aspect of our operations from our menu to marketing to our guest experience to kitchen efficiency.

These strategic initiatives place our guests at the center of everything we do making sure we're elevating our dining experience and positioning us to grow our restaurant base and improve shareholder returns.

Notably, our growth journey has a long way to go as there continues to be expansion opportunities to reach at least 425 BJ's in the United States.

Our new restaurant growth plan is predicated on expanding at a rate that allows us to open new restaurants in a high quality manner and I believe the results of our most recent openings reflect the efficacy of that approach.

In fact, our last eight restaurant openings had weekly sales averages over $116,000 just in -- in this second quarter marking some of our best openings in recent years.

We continue to believe it's important to balance our resources between sales and traffic building initiatives, investments in process and efficiencies, new restaurant growth and returning capital to our shareholders.

During Q2 we repurchased approximately 422,000 shares of our common stock and paid our seventh consecutive quarterly cash dividend while we maintained a strong balance sheet with low leverage.

The BJ's growth story continues to have a long road ahead and I think you'll agree that our recent results are a strong indication that we continue to make progress and building on the strength of the BJ's brand to provide the industries best guest experience while delivering increased value for our shareholders.

So I'll now turn the call over to Greg Levin for a review of our finances and then we'll do some Q&A.

Greg?.

All right, thanks Greg.

Before we get into all the details of the quarter, let me remind everyone that beginning with Q1 of this fiscal year, we adopted Accounting Standards Update 2016-02 which is Topic 8 -- 842 for Leases which requires us to put the present value of our lease assets on our balance sheet as a right to use asset with a corresponding lease liability.

The new lease accounting standards also require us to make that one-time non-cash cumulative adjustment to retain earnings of approximately $29 million of sale leasebacks gains that we were amortizing in occupancy and operating costs over the term of the existing leases.

This results in an annual increase in our operating occupancy cost per year of a little over $2 million. As a result, this new accounting standard impacted our restaurant level margins in the second quarter and our overall operating margins by approximately $700,000 or 20 basis points which equates to $0.03 a share for the quarter.

And a full reconciliation related to this new accounting standard is included in today's press release. Our total second quarter revenues increased 4.7% to $301.1 million and that was driven by our 2% comparable restaurant sales growth and a 2.6% rise in operating weeks.

We have now driven positive comparable restaurant sales for seven consecutive quarters. From a monthly trend perspective restaurant sales improved throughout the quarter.

At the end of our Q1 earnings call in late April, we noted that comparable restaurant sales were trending in the mid-1% range and were impacted form Easter shifting from Q1 in fiscal 2018 to Q2 this year. As expected, the comparable restaurant sales trend improved into the mid-2% range for the rest of the quarter.

Overall, we saw an increase in our average check of around 3% which was partially offset by a traffic decline around 1%. We estimate the flip in the Easter holiday impacted Q2 sales and traffic by approximately 40 basis points and 30 basis points respectively.

So excluding Easter weekend, our comparable restaurant sales would have likely increased approximately 2.4%. Looking below the top line, our cost of sales was 25.5% which was up 50 basis points compared to last year, second quarter.

As we telegraphed on the last call, the increase was primarily due to high produce costs primarily from avocados and menu-mix related to the rollout of our very successful new Tri Tip sirloin.

Like two years ago when we rolled out our slow roasted prime rib, we expected some pressure on cost of sales from the success we are having with our Tri Tip sirloin and like our prime rib, the protein-centric Tri Tip sirloin specials have a higher cost of sales percentage but also generate higher check average resulting in greater gross profit dollars.

Our labor of 36% for the second quarter rose 50 basis points from a year ago due primarily to higher average hourly wages. We also invested in the rollouts of our slow roasted Tri Tip sirloin and our gold standard kitchen systems.

These factors were partially offset by lower incentive compensation and taxes and benefits compared to the year-ago quarter. At the end of Q2, approximately 80% of our restaurants had completed the new gold standard kitchen system implementation and we expect the remainder to be finished by the end of July.

As a result, our key members are still working through and adjusting to the new procedures and we anticipate that these learning's will last through Q3. Hourly wage growth in Q2 was in the mid-single digits and I expect it to remain in that range for the rest of Fiscal 2019.

Operating occupancy costs increased 90 basis points to 21.4% from last year's second quarter. The increase was primarily related to higher delivery fees and maintenance costs related to our handheld server tablets as well as the 20 basis impact related to the new leased accounting standard that I reviewed earlier.

Included in operating and occupancy costs is approximately $6 million of marketing spend which equates to 2% of sales and is pretty consistent with last year's second quarter. Marketing costs came in lower than anticipated as some production costs were moved into Q3 and Q4 of this year.

Our general and administrative expenses of $16 million were within our expectations and 20 basis points better than a year ago. In terms of capital allocation, we continue to use our strength or our strong cash flow from operations to execute our expansion plan and invest in our business; opportunistically repurchasing shares.

Total capital expenditures for the second quarter were approximately $39 million and we continued to expect rose capital expenditures for Fiscal 2019 to be in the range of $80 million to $85 million. During the second quarter, we allocated $19.2 million to the repurchase of 422,000 shares of our common stock.

We have now repurchased and retired approximately 10.4 million shares of BJ's stock for $49 million reducing our diluted share account to approximately $21 million and we have approximately $91 million available in our current share repurchase authorization.

In addition during the quarter, we returned $2.6 million to shareholders through our quarterly cash dividend. With regard to liquidity, we ended the second quarter with approximately $23.4 million of cash and $100 million of funded debt on our $250 million line of credit and that is, in fact, in effect until November 2021.

With trailing 12-month adjusted EBITDA of $136 million, our funded leverage remains modest at 0.7 times. Before we open the call up to questions, let me spend a couple of minutes providing some commentary on our outlook for the third quarter and the remainder of Fiscal 2019.

All of this commentary is subject to the risks and uncertainty -- and uncertainties associated with forward-looking statements as discussed in our filings with the SEC.

With July 4th moving to a Thursday this year from a Wednesday a year ago, coupled with less extreme heat in California then the year ago, we have experienced a softer start to this quarter just as we experienced a softer start to Q1 with the shift of Easter from Q1 to Q10, Q2, this year.

As such, comp sales for the first three weeks of July are roughly flat with a year ago.

In parsing July's comp sales to-date, the softer sales are primarily in certain areas of California specifically the Bay are of Northern California where many restaurants are going over double-digit comp sales from a year ago as well as some other pockets in California that also had very large comps a year ago stemming from some early July California fires.

If we exclude California from our comp sales across the rest of our portfolio of restaurants, we would be up in the mid-2% range for the first three weeks of July. In addition to the softness in California, we have seen a deceleration of our delivery growth rate in July.

We have been experimenting with some different offers to drive trial particularly with our third-party partners. Our objective is to test offers which are more spend efficient and also are more unique to our concept enabling us to stand out in a much more crowded field than just a year ago.

For example, we've been testing a free Pizookie with a Door -- with our DoorDash partners for the last couple of weeks and offer that as less costly but is trending at a lower take rate as compared to a free delivery. That offer for the free Pizookie is based on a spend of $19.95. These experiments will require some testing and learning over time.

Also, for those of you modeling while Q3 was our highest comparable sales for the quarter of 2018 at 6.9%, part of that increase was due to lapping of the hurricanes that took place in both Texas and Florida in 2017.

In fact, there were three specific weeks in which we were comping around 10% or greater in 2018 which were directly related to the hurricane rollover. Taking those weeks out, our comparable restaurant hurdle is closer to 6% which is not that much higher than the level that we just comped over in Q2.

With regard to restaurant operating weeks, we are looking at approximately 2680 weeks or so in Q3 and moving on to the rest of the P&L, we continue to see high costs for avocados to start Q3 although we are now starting to see prices abate as well as some other commodity item increases.

Overall, I'm expecting cost of sales to be in the upper 25% range for the quarter, or ever so slightly higher than where Q2 came in.

With regard to labor, we continue to expect wage inflation and the higher labor expenses as we finish out implementing and training for our new kitchen systems which is expected to largely occur by the end of the quarter.

Based on current sales trends and that we still have restaurants implementing our new kitchen system rollout, coupled with Q3 being our lowest weekly sales average of the year; I'm expecting labor in Q3 to be in the low to mid-37% range and then declining in Q4.

We are targeting operating occupancy costs in the low 23% range for Q3 and that includes $7 million in marketing spend. In last year's Q3, our marketing spend was $6.1 million which equated to approximately 2.3% of sales last year.

The increase in marketing in Q3 of this year is primarily for increased media and production to help build awareness of our new large party catering offerings and reflects some rollover cost from Q2 to Q3. However, for the year, our total marketing spend will be in the low to mid-2% range which is consistent with last year.

As I said a moment ago, Q3 is seasonally our lowest weekly sales average quarter for the year and as we've reminded you previously, labor and operating occupancy cost as a percent of sales are highly correlated to weekly sales averages and comparable restaurant sales growth.

Our G&A expenses for the third quarter should be around $16 million as we continue to expect total G&A for Fiscal 2019 to be around $65 million.

Pre-opening costs should be in the $1 million range for the third quarter and that's based on two planned new restaurant openings plus some pre-opening costs for restaurants that are expected to open later this year.

I expect our tax rate in the third quarter to be in the 8% range which should be more in line with our current annual effective rate and that's less any discrete items that may happen. And our diluted share outstanding should be in the mid to high $20 million range for the quarter.

In closing, our consistently positive sales trends reflect the progress we continue making in elevating the BJ's concept and our success on a range of sales building strategies.

We are also very excited about our initiatives to improve the processes and procedures at BJ's through our new gold standard kitchen systems and make it an even better place to work and for guests to enjoy.

This focus on driving sales while being maniacal on productivity and efficiency combined with our balanced approach to new restaurant expansion are the pillars of our near and long-term operating success and ability to gain market share.

These factors coupled with prudent management of our capital structure and capital allocation policies that return capital to our shareholders is a proven formula for a sustained long-term financial growth and the appreciation of shareholder value.

We remain confident that the plans and initiatives that we have in place have established a solid foundation for further success as we continue taking market share in the casual dining space and will further elevate the awareness and attraction of the BJ's brand and concept and pursue -- and we will pursue the massive expansion opportunity before us which positions us to double in size as we bring the BJ's concept to more markets across the U.S.

We're excited about our future and our operating teams are executing at a high level in support of our strategic initiatives. That concludes our formal remarks. Operator, please open the call up for questions..

[Operator Instructions]. And our first question will come from Brian Bittner with Oppenheimer..

Thanks, hey guys.

Greg, just on the third quarter line item margin expectations that you just gave, what same store sale trend are you assuming for the full quarter within those -- those margin expectations?.

Yeah, Brian, we don't give guidance on our -- on our comp sales. We kind of give you where we are right now and we kind of look at different ranges from that standpoint within our business. So, not only that, we're a few weeks in and kind of flattish.

I think you can kind of assume that it's flattish to up in regards to where we're thinking comp sales go..

Okay.

And as you kind of analyze your trends so far this quarter and you're able to look back to last year, is there any reason to believe that your trend will improve throughout the quarter? Is there any reason to believe that the California market will begin to perform more in line with the rest of the system or should we all be assuming flat trends for the quarter is the base case to think about?.

Brian, I don't know if we have an exact answer for you. I mean, when we look at our numbers we were somewhat surprised because there's actually fairly -- fairly -- it was a fairly quick change in the sales trends, meaning, we finished P6, let's just call it the mid-2's and every week in P6 was pretty solid.

We thought the first week, and I do still believe the first week is a little bit of a July 4th flip from that standpoint, but as we started looking at some of our numbers, we did notice last year that we had the Miramar fires down in the San Diego area and that impacted a lot of our San Diego restaurants.

We had a Madera fire, we had a Yucaipa fire out in -- Empire [ph] hitting some of our restaurants.

So, I think as -- as we get through that, that should be cause for an -- an improvement in our California restaurants but, as we say, and we always say this kind of on the calls, we kind of give you the information that we have to-date and I know that sounds like sometimes not enough but even as we were looking at our business in June, we weren't expecting all of the sudden it to change from what we saw, literally the last week of June, to what we've seen the first couple of weeks of July.

So, you know, I'm planning that it's going to improve and I think we've got good initiatives and things we like in our business from that standpoint. We feel very comfortable at least three weeks in how the rest of our portfolio is doing. We're -- we like the strength that we continue to see in those markets.

As we said, that would be up in the mid-2% range, that's including in Texas, Florida, Ohio, etc. It's just California has come out of the gate a little bit softer here and as we went through and tried to analyze it and isolate it down, those are the things that we've seen a little bit softer in the Bay area.

We're going over against some high comp sales of a year ago related to some fires and then as we've mentioned on the call, maybe while still growing in healthy double digits, not having quite as strong a tailwind maybe as third-party delivery was a year ago but still a tailwind for us..

Okay, thank you..

And next will be Will Slabaugh with Stephens..

Yes, thanks guys. First I had a question on value.

Curious how the Brewhouse Specials mixed versus what you've seen in prior periods and is there any sense that the customer is either gravitating toward or away from value in your menu at this point?.

Well, when we look at our Brewhouse Specials they've continued to perform well for us and I think when we look at the number, in fact I was just looking like at our Pizookie incident rate and frankly that number was flat with a year ago that tells you that our guests are still liking it, obviously, but it's not necessarily increasing in this quarter from that standpoint which means that we're not necessarily seeing people just gravitate towards that specific day.

I think when we look at our other specials in regards to our Brewhouse Specials, they continue to do really well for us but at the same time, as Greg Trojan mentioned in some of his formal remarks, our prime rib continues to do well which is kind of -- we -- we still think it's of value even though it's a higher check item, our -- and light entrees continue to do really well with the zoodles that we put on, so those are all higher items.

I don't think we're seeing a movement just towards Brewhouse Specials if that's kind of the --.

I think Will, not to put words in your mouth, I think you were thinking of maybe the opposite that we're seeing a shift away from those value items, and we're not, is the short answer, is we're still seeing, you know, good popularity. Brewhouse Specials are not, you know, losing momentum.

In fact, I would say, not I say -- our -- our mid-week sales performance is stronger due to Brewhouse Specials than if there's a softness, you know, day of the week-wise, it's been more on the weekends than during the week and I think the value offerings of Brewhouse Specials and happy hour during the week are really helping -- helping keep -- healthy --.

I guess I would also add, Happy Hour, or Happy Hour daypart is doing very well, as well as the combos or Tri Tip has been doing well which are both value priced..

Thank you. And curious also on the plans for cash, you mentioned the $91 million left on the buyback authorization, you have $23 million, I think, on the balance sheet not to be generating cash as well.

Just given where valuation is, how aggressive can you plan to be on the buyback here?.

Well we always, I think, look at our business, Will, and you hit it at the end there, on kind of an enterprise EBITDA and we have a, obviously, very solid and strong EBITDA of $136 million or so, I think I said, on a trailing 12-month. So, we have that pattern there, we'll probably deploy it accordingly going forward..

Got it.

And just to follow-up on your July 4 comment, if you were to exclude the July 4th shift, is there any way to kind of parse out what that trend would look like?.

I don't have the exact weeks in front of me to kind of normalize for it, but I would tend to say that the shift obviously improved coming out of July 4th week from that standpoint.

I -- I would tell you -- I would say, to add to that though, even pulling out the July 4th, I don't think we are where we were, in let's call it, P6, in June where we were seeing comps across the board in the mid-2's..

Okay, fair enough. Thanks, Greg..

And next will be Alex Slagle with Jefferies..

Thanks. I wondered if you could talk about check growth.

It sounds like you're getting the 3% check that you had previously discussed as the level you wanted to hold margins but the commentary seemed to suggest that you might need more than this to hold the line? How much of this is sort of commodities or labor or traffic, if you could sort of parse through those pieces?.

Alex just to be clear, really we were targeting, we think around a 3% comp sales level of sales growth is -- gives us, you know, a good shot at -- at holding margins, as we've said -- said before. We did not mean to imply we need more check growth than that. What we did see is some weakening in traffic relative to Q1 and the trends.

So, you know, all of the things that we're working on, you know, we'd rather see, you know, the balance between check growth in that 3% range, which as you -- you'll recall, we fell short of that in Q1 for a variety of issues for most -- most prominently the promotional calendar and some of the interactions of loyalty with some of our beginning of the year promotions.

So we're happy that, you know, Tri Tip has helped us a lot. We've continued to be wiser, if you will, around the balance of -- of promotions. So, you know, in a perfect world what we'd like to see is, you know, maintain 3% check growth.

Ob -- obviously, as long as it's productive check growth, we'd take more but we're not sitting here trying to drive checkup further, we're trying to drive traffic..

Makes sense and, I don't know if you have any updated thoughts on development for next year, just whether you might reaccelerate or whether you'd sort of like to hold off on thinking about that given the traffic environment and some of the other issues like labor and construction costs?.

You know what, it's still early for us to make any predications or pronouncements. I mean, we are really, really enthusiastic about how our new restaurants are performing and coming out of the gate and -- and a lot of new trade areas for us.

So, you know, certainly we'll balance that with what we think is going on in the environment but, you know, we haven't made any decisions at this point..

Great, thank you..

And next will be Matt DiFrisco with Guggenheim Securities. Matt, go ahead sir..

Can you hear me?.

Again, go ahead. Yes, we can. Thank you..

All right, thanks. I just -- this is actually Matt Kirschner on for Matt. I have a quick question on the GSKS rollout and then a question around the -- the digital and delivery sales.

But can you quantify the GSKS rollout impact during the second quarter?.

It's probably somewhere in the neighborhood of 10 to 20 basis points, Matt. It still came in line with about 125, maybe a little bit more of hours per restaurant.

At the same time, I think we were probably around 160 to 170 restaurants that got completed in Q2 with the remainder coming here in Q3 and when I think about that, 125 or so hours, it's not all one week and then it's done.

It takes time to kind of implement this, get the sea legs under -- under each restaurant team and then drive efficiencies out of it. So, it spans over a few weeks..

Okay.

And is it possible to also give us an updated number for percent of total sales on off-premise delivery and then also catering? I know you mentioned pushing that more in the third and fourth quarter with some new marketing but can you quantify that as well now?.

Well, our off-premise is right around 10% or so and it's still pretty evenly split between delivery and takeout. In fact, one of the things that we're encouraged to see is that our takeout business lately has been growing and obviously we like takeout a little bit more because you don't pay those commissions to the delivery companies.

Our catering is small. I believe I want to say it's less than 1% of our sales and we think that's where we've got an opportunity to grow that, it just rolled out with some of our changes here in the May timeframe and as I mentioned on our call, we're going to do some more marketing or some new marketing around that in Q3.

We originally were going to do it in Q2 but frankly the catering packages and things we put together took a little bit longer to get out so that's some of the shift in the marketing side of things.

But, it's a small amount and we're going to go after that for the second half of the year and we think we've got a great opportunity to grow that part of our business..

Great, was there anything that you guys did differently to kind of hold up the takeout business versus the delivery business?.

Just in general, I mean, we've been working hard. Our ops team around -- you know, we've been putting some capital in our -- in our restaurants to make it easier for both our team members and our guests. We've done a lot of work online in terms of an ordering perspective to make ordering takeout more -- more convenient.

So, you know, this isn't something, although we've launched this next generation pretty recently, we've been -- we've been working on, you know, off-premise and the operations piece, you know, for quite a while, over a year now, and as I mentioned in my -- in my script, the -- it's really good to see our MPS scores both improve -- they -- I would say from an absolute basis they still lag dine-in which doesn't, I don't think surprised anyone on -- on the line here, but they're not drastically different and -- and we're heartened by the fact that we're seeing the fruits of all of the improvements and we're making from a restaurant perspective -- because fundamentally, if it's not a great guest experience, it's growth on on-premise is not going to last, right? So, you know, it's not -- again, it's not perfect but I think it's headed in the right direction..

Would you say it's fair to characterize that your most loyal customers skew towards the takeout and then new kind of incremental customers tend to try the delivery?.

You know, I think that makes logical sense, but I can't tell you we -- you know, we looked at our -- have looked at the data to support this statement, but I think that's a pretty good guess..

Okay, and then just one last question around the new store development. Obviously you highlight this strong opening. I just had a question around the stores when they drop into the comp base.

I think there were two this quarter, I think one next quarter, but I mean, how do the honeymoon periods look? You're entering newer kind of Tier 2, Tier 3 markets specifically in Connecticut for the first time.

You know, how do these stores hold up after 18 months?.

Yes, we tend to still see really the same trends in our business and that is at 18 months they generally come into the comp base a little bit in the negative because the honeymoon timeframe and then from there they start to flatten out and start to move ourselves better overall. And I don't think we've seen any real change of that.

I accept the fact that our new restaurants are opening strong and as a result, when they come off the honeymoon, they're not coming down nearly maybe where they were in some of the other markets.

So, I think as we look at it and see it as they come into the base, maybe there's a little bit less of a drag on them then maybe where they were -- the classes in the past years..

Okay, thank you very much..

And the next question will come from Nick Setyan with Wedbush Securities..

Thank you.

You know, there was some TV advertising I think that was planned for Q2, can you kind of maybe talk about, you know, the plans around Q3 and Q4, maybe whether you can maybe put some TV advertising in some of the softer California markets to help out?.

Yeah, in general, Nick, our medial lineup is pretty similar than -- than what it looked like a year ago, you know, from a TV perspective we are -- we are -- listen, we're going to react to -- to these trends and, Kevin, who can maybe speak in a little bit more detail here, but we are looking at, you know, options of moving other elements of our media mix, you know, digital, what we're doing through loyalty.

We have more levers than we've had in the past and -- and we are certainly looking at options to move some more guns where they're needed more than not, right?.

Yes, I guess just from a media perspective, you know, we have a lot of levers to pull. We've got both on and off premise marketing.

We have digital marketing really that's targeted around all of our restaurants that we're able to adjust at times and then from a mix perspective, you know, we're always able to play with reaching newer guests as well as retargeting existing guests.

So we still need adjustments with California, we have considered both a media mix adjustment to maybe targeting more of our -- you know people that have visited our Website in the past as well as maybe heading up more towards California at the expense of some other markets. We're still evaluating some of those opportunities right now..

And Greg mentioned, Greg Levin, mentioned the testing on the third-party delivery, you know, trying some different things that maybe haven't had as much traction to date. Is that something that you're planning to continue or are there changes coming there as well to maybe improve that--.

Thanks for asking that question, Nick, because this is -- obviously, in general, this growth in on-premise and third-party delivery is still new to everyone, right, including -- including ourselves although we were in there a little earlier than a number of folks.

And it's -- it's changing rapidly just by virtue of its growth rate and we look at the promotion efficacy of some things that we ran a year ago versus today. There are a lot more competitors and attendees in the third-party delivery order platform.

So when they're running and we're participating in certain promotions, it's -- it's more difficult to stand out and they're just not as incremental, frankly, as what they were even a year ago.

So we're working with third-party partners and putting, you know, Kevin's teams creative hats on to look for ways where we can stand out and differentiate more than just the standard offers.

And -- and, you know, it's going to take some -- some trial and error but I think we're not going to -- you know, we're not going to spend our way to buying sales at levels that we don't think really make margin sense either.

So, if that's going to take some trial and error to -- to find that right balance and what we highlighted is -- that some of the softness that we're seeing, and this is national, that it is a slowdown. Now, when I say slowdown we're still in healthy double-digit growth rates here so, just be -- to be clear about that.

But given the high growth rate that we've been seeing, part of the impact -- you know, it has impacted comps a bit when that rate has slowed down a bit as we've lapsed some of the offers of a year ago that worked really well..

Thank you, and just last question, you know, for Greg Levin.

You know, on the margins, quarter day comp in Q2, you know, was sort of that one -- mid-1 and then the trends improved but relative to your commentary, the margins or expectations, I guess you kind of ran through, you know, in terms of labor inflation and the third-party delivery fee, aside from the COD, which is very understandable, you know, on labor and other OpEx, what surprised you the most in terms of the negative impact there?.

In Q2?.

Q2..

Thank you. I think the biggest surprise in Q2, if you -- and, again, I want to make sure you're talking in Q2, was, I think the avocados, you know, avocados are in our top ten of spend and that probably was a little bit more of a surprise for us than I was anticipating there.

I think the success of Tri Tip, which has been really, really successful, has actually challenged our operators a little bit in regards to maybe just making sure they're prepping it and so forth so there's maybe some -- a little bit more inefficiencies around getting Tri Tip in place in Q2 and I think we've worked ourselves through that but those are probably two things going into Q2 that maybe were a little bit more challenging than maybe we were anticipating going in..

Thank you..

And the next question will come from Mary Hodes with Baird..

Good afternoon, thanks for taking the question. I just want to follow-up on Matt's earlier question regarding the cost pressure you saw in Q2 related to the GSK implementation.

Does that 10 to 40 basis point drag that you highlighted for Q2 from implementing that also include the drag from introducing Tri Tip or what would you say that the total drag on restaurant margin in Q2 was from those one-time initiatives?.

Yes, so when you think about it, and I don't think, Mary, I said that the GSKS was 10 to 40 basis points, I think GSKS is probably more in the 10 to 15 to 20 basis points. It's about 125 hours per restaurant on that.

I would probably, just thinking about how Tri Tip rolled out and the adjustments that we had to make, there is probably another 10 to 20 basis points related to Tri Tip in regards to how we roll that out and the additional hours from that.

I think we're continuing to work out -- work our way through those things and we expect, going into really, I think, into Q4 and later Q3, that will reach our efficiencies around both of those changes there. In fact, I would probably say Tri Tip is a little bit more behind us and GSK, GSKS, is in front of us a little bit..

Okay, got it.

Thank you very much for that clarification and then can you just talk at a high level about the level of promotional activity that you're seeing in the industry right now and with traffic turning negative in Q2, do you think that there's any changes that you need to make in your philosophy around promotions or value to drive better traffic in upcoming quarters?.

That's a lever we look at literally, you know, almost everyday, certainly every week in our business, Mary, and -- and, look, there's always promotion out there, I think I said this on the last -- on the last call, we get asked that question every single time as if, you know, this level of promotion and competitiveness in our -- in our market is, you know, intensifying or wildly different and we don't see that.

I mean, I think it's kind of always a constant on and the other element I'd mention is people forget about, we're competing in a very fragmented industry at the end of the day; the number of independent seats out there is much greater than the chains we all think and talk about.

So -- so, honestly, I just think that can be a little overdone and over talked about in our -- in our space at times. It's something, obviously, we pay a lot of attention to in general as our business is going up and down and so we'll make adjustments.

I think the most pressing activity is making sure we're being more aggressive where our business needs the help the most and right now that would be California..

Thanks very much for the perspective. That's it for me..

And next will be Chris O'Cull with Stifel..

Yes, thanks, good afternoon guys.

Greg, I understand you're pleased with this new store sales performance but can you talk about the average investment in those eight locations?.

Yes, I have to almost parse that a little bit because I want to say I'm -- I'm looking over at Greg Lynds a little bit. I want to say four of those restaurants were Seritage or Sears deals from a year ago.

So like all the New York -- New York was, [indiscernible], Rhode Island was and as a result, those investments were in the $4 million or less range because we were delivered a shell and we were delivered some of the utilities and stuff forward.

I would tend to say that, and I'm going to let Greg -- Greg Lynds jump in here in a second, I would tend to say though, looking a little bit going forward that we continue to see labor inflation in the construction world as well as some material inflation and we tend to see our standard prototype probably closer in the 4, 8 range or greater; so $4.8 million plus range and so it's a mixed bag.

I know the eight, we have some that we got in at a really low investment cost, I think overall, but I think if you're thinking about going forward, it's a little bit higher.

Greg, do you want to add to that?.

No, I think you've covered it. I mean, we're seeing price increases in steal, asphalt, concrete, like everybody. In probably 2018 versus 2019 we're seeing total price increases in the range of 8% to 9%..

That's helpful, thank you.

And then just to follow-up on that, I mean, with the restaurant margin and even profit dollars coming under so much pressure, has the sales to investment hurdle rate changed in order to justify a compelling return?.

Not really. I understand your question, Chris, and we tend to look at these really kind of at the -- at the longer-term from that standpoint. There's going to be inflation that comes up and then there's going to be times when it starts to modify and come down.

If we had to look at our business ten years ago, we were spending at that time, $5 million to build a restaurant. And then through some value engineering and other things that made sense for us, we brought it down to $4 million.

I think ultimately when we look at our business and we think about the fact that we're doing, in this quarter, $116,000 weekly sales average out of our eight new restaurants that you're looking at, somewhere in the neighborhood of close to $6 million AUV's.

I think you tend to bring in a really great strong cash flow that still tends to be the place where we would want to invest our money and build our restaurants. We just come to the fact that we've always been this way, that we're going to build quality over quantity.

We're going to make sure we can do it with high quality as well which means making sure that we have the right team members in place. So, I don't think there's any necessarily change in our view in regards to hurdle rates for investing in the new restaurants and so forth, because we still think it's the best place to invest BJ's money.

But we're going to do it at quality over quantity. We've never been on an investor call saying that we're going to close 20 out of the last 40 or 50 restaurants we've opened; something we're very prideful on the fact that we go out and select great place, great locations, and execute them well..

Yes, that's helpful. And then just the restaurant margin was down, obviously, a couple hundred points this quarter with the two comps. So -- and it looks like it's going to be down, based on your guidance, another 150 on a -- on a softer comp.

So, how do you keep margin flat with a 3% comp?.

Well, we think with the 3% comp and you start to come back and take out some of the initiatives that we rolled through, it's probably going to be a little bit of a challenge from that standpoint, I think, as you look at it. But I think there's some efficiencies that we can go after.

I also believe, as we look at this, some of it is transitory, you know, avocados are starting to come back in line from that standpoint. So, we would probably pick up the basis points there. We've got the basis points in some of the investments that we're rolling out in labor that's started to help us.

And then, as always, we're going to go after that operating occupancy line and make sure there's areas that we can get more efficient at in our business.

I think there's a challenge -- we think -- Chris, real quick, the challenge we face, frankly, and I try to make this clear short-term, is Q3 is just our lowest weekly sales average quarter and that with, you pay some utility rates, we start to pay for the NFL package in our restaurants.

There's just little things that kind of hit us in Q3 but I think when we look at our business longer-term, we like where we are, we like the menu, variety that we have, the fact that we can have value on one side and we can have higher priced items or center plate entrees on other, but that will allow us to drive sales, drive check average and provide a great guest experience that frankly will allow us to drive margins..

Okay, and maybe just one last one.

Are any stores that have hit a stride with the new kitchen systems seeing any labor savings benefit from the new systems?.

No, Chris, I mean, it, A, is still a bit early and, you know, as we've been saying consistently, is we're doing this for quality, you know, team member, great place to work, all of the nerve center of what our kitchens are.

We do think that over time all -- all of this process, reengineering and organization will yield some savings but, we're not -- we're not -- honestly, we're not asking for savings at this point and as people are, you know, as our operators are scheduling labor from this perspective, I think we're a bit away from that but, you know, we'll likely see some but it's just too early.

We want to make sure these get engrained the right way and we're prioritizing the most important reasons we're putting these systems in place and, you know, think of it as a second -- a second phase of looking at our kitchens once these are embedded in behaviors.

And that's the thing, I mean, just to highlight as Greg's been describing, the rollout itself is more around physical organization and retraining. The ongoing part of GSKS is the behavior changes of what people are doing when and those take a little bit more time.

So we want those to fall in place and we think those will then evolve into some efficiency in terms of hours..

Great, thanks guys..

And our last question today will come from Nicole Miller with Piper Jaffray..

Thank you. Good afternoon, two quick ones.

Earlier in the discussion you talked about softer weekends, I believe, where do you think that customer might be going; at home waiting for you to deliver to them, are they going to a peer group, or is this a broader macro-comment about people staying at home?.

You know I don't think we know the answer to that Nicole, to be honest, and I think one of the things that we take a close look at and want to make sure is that our value doesn't get out of balance, right? So, we've been driving so much value both at dinner and during the week with the -- you know, with the one, two punch of both happy hour value and Brewhouse Specials.

You know, we've -- we've been with the -- with the introduction of slow roast and prime rib which is a weekend only, you know -- was a weekend only launch and is a weekend only product.

We -- we've been balancing that well, historically, right? And so, you know, that's -- that's -- the pushes and pulls of our business is that, you know, we may -- we may need more news or more value on the weekends relative to the investments that we've made during the week.

I don't say that with certainty but as we're looking at these trends, that's something that we're looking at..

Okay, thank you, very fair. And then just a second and last question, you also talked about setting aside some additional marketing this quarter to talk about large party ordering.

And I want to understand, you know, how will that -- where will you do that marketing and then what can you share in terms of large party ordering? How far will you go in terms of delivering time, what's the price hurdle, what's the margin profile, etc.?.

Well, let me do the last part and then I'll ask -- I'll ask Kevin to fill in some of the -- a little bit more of the specifics.

We're not going to get too far into those specifics for competitive reasons, obviously, but -- but our -- most importantly is the product lineup that has been, you know, we really have constructed these both a la carte items and these combinations with value in mind.

So, you know, at the starting price points you can see large parties at -- at and around $10.00 per person which we think is quite compelling. But there's, I think, if you scroll through these varieties and do a relative, you know, value check, you'll see that we compare, I think, more than very competitively.

So, that's been -- since this, again, is, we think, very incremental to our business, we wanted to, you know, frankly be pretty aggressive from a value and pricing perspective.

Our delivery radiuses, you know, don't, are not -- don't vary from our normal radiuses which range, you know, based upon drive times, so they -- mileage isn't the best way to think about it but we're usually within 20 minutes of drive time is on the outside of our delivery ranges in terms of those logistics..

From a marketing perspective, you know, and Greg said it in past calls, we've invested a lot over the last couple of years in everything from our digital Web experience to our ability to target guests both to our loyalty guests as well as our digital marketing.

We've invested heavily in social and influencers and PR and with this catering campaign, or large party campaign, we plan to use a lot of that, and you know, not to mention that I'd say roughly half of our business, or at least from appeal perspective, we're looking at both business-to-business as well as just to consumers.

So we've got a campaign we're developing, a lot of tactics that will allow us to not only reach businesses and business decision makers but also those folks who are planning large parties on a personal level and we'll do some more disruptive things as well that hopefully will get us noticed in at least the casual dining space as one of the few brands that can actually offer something for everyone.

So that's really the plan right now..

The only thing I'd add to that Nicole is -- is the power of our operators. You know, large party catering is -- is a relationship business at the end of the day, particularly the B2B portion.

So, we have a plan in place to make sure our -- our restaurant teams are involved in making sure people in their trade areas know -- know about this great offering that we have as well..

Thank you so much..

Thank you everyone..

Thank you. And that does conclude today's conference. We do thank you for your participation, have a wonderful day..